The European Commission has temporarily approved, under EU state aid rules, the setting up of a "bad bank" for German Landesbank WestLB which takes over a portfolio of toxic and non-strategic assets with a nominal value of €85.1 billion. To this end, WestLB is receiving capital of €3 billion from Germany (SoFFin). The Commission has given its temporary approval of the measures because it is necessary for reasons of financial stability.However, the Commission has doubts that the measures are compatible with state aid rules for impaired asset relief(seeIP/09/322)as well as with those for the restructuring of banks (seeIP/09/1180). The Commission has therefore opened a formal in-depth investigation under Article 108(2) of the Treaty on the Functioning of the European Union - TFEU.

Competition Commissioner Neelie Kroes said: “The seting up of the bad bank shows that WestLB's restructuring process is underway. However, I am surprised about the level of the additional aid required and will make sure that the new aid is fully compatible with EU state aid rules."

WestLB AG, based in North Rhine-Westphalia (NRW), with total assets of €288.1 billion as of 31 December 2008, operates as a central bank and a provider of services for Germany's biggest regional saving banks' network and as a commercial bank.

On 12 May 2009 the Commission approved a €5 billion risk shield protecting a part of the bank's securities portfolio (seeIP/09/741) on the basis of a restructuring plan that envisages the set up of a bad bank and the subsequent sale of the remaining banking activities. On 7 October 2009 the Commission approved additional emergency aid for WestLB for a limited period of two months (seeIP/09/1434) when a delay in the setting up of the bad bank and increasing capital requirements for the previously covered portfolio led to its breach of regulatory capital requirements.

In December, the owners of WestLB agreed with SoFFin on the structure of the bad bank. Its objective is to take over and wind-up WestLB's portfolio of toxic and non-strategic assets. Since the bad bank is expected to make losses, it is equipped with equity of €3 billion and a guarantee of €1 billion by WestLB's shareholders. Under the German bad bank law, losses exceeding these amounts must also be covered by thecurrent shareholders; however, for the savings banks associations this obligation has now been capped to an amount of €4.5 billion in total.

Despite the doubtsnow caused by the specific design of the bad bank, its temporary approval is necessary for reasons of financial stability.However, the Commission has opened in parallel a formal investigation procedure to assess the compatibility of with the Impaired Asset Communication of 25 February 2009 (seeIP/09/322).

Based on the information received so far, the measure cannot be definitively authorised as it does not fulfil the conditions of transparency and disclosure, valuation, burden sharing and remuneration, which are all necessary elements to ensure the restoration of viability and a mitigation of the negative effects of the massive state support received. In the meantime,Germany has committedto ensure that the restructuring plan for WestLB will be aligned with the objectives of selling the remainder bank as foreseen in the original restructuring plan,of appropriate burden sharing and of adequate limitations of distortions of competition.

The non-confidential version of the decisions will be made available under the case numberN555/2009 in theState Aid Registeron theDG Competition websiteonce any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in theState Aid Weekly e-News.